Hedge Funds Look Forward to 2013 Revival

After a strong finish to 2012 that saw many hedge fund managers enjoy the largest profits in several years, many in the industry are now becoming hopeful that 2013 will bring the same level of success. The Financial Times is reporting that the first quarter of this year will likely be one of the strongest ever for many hedge funds, as they ignore global economic concerns and pile into riskier assets.

In what may be a surprise to many, European-focused equity funds have been some of the strongest performers to date. For example, the largest European equity fund manager, Landsowne Partners, saw its flagship fund climb 7.75 percent in the first two months of 2013. Whether European funds can maintain their edge amidst gathering economic storm clouds remains to be seen, though many funds have built a significant buffer of positive returns already this year. Other top performing European managers, according to the Financial Times’ report, included Sloane Robinson, with a 17 percent year to date return, and Egerton, who enjoyed an 8 percent climb in the first two months of the year.

These returns also compare well to global equity benchmarks, which is a positive development for an asset class that has struggled to outperform equity indices for some time. While an 8.5 percent rise in the S&P 500 is certainly strong overall performance, top performers in the hedge fund industry are now providing even stronger returns to their investors. Over the past five years, the average hedge fund has only returned 8 percent to investors, so to see that kind of performance in a matter of two months is encouraging.

Are Returns Symptomatic of Excessive Risk Taking?

One concern for investors will be whether the increase in returns is simply reflective of hedge funds taking on risk in a desperate attempt to maintain their assets under management. There is no doubt that significant macroeconomic risks are beginning to cloud the outlook in Europe, threatening in some cases the very existence of the Eurozone. On the other hand, many experts believe that the worst is over, and with established frameworks now in place for dealing with most perceived financial risks, little downside remains. In fact, many hedge fund managers are pointing to a higher risk tolerance in 2013 being responsible for some of the sustained gains.

Luke Ellis, President of the Man Group, told the Financial Times, “Last year and in 2011, everybody jumped at every shadow. This year, if you look at the shadows – the Italian Election, sequestration in Cyprus, things that would have caused a massive run for the doors – we have been able to ignore them.”

That said, the potential for a black swan event stretching financial stability mechanisms to the extreme still remains, and many would argue that Europe is certainly not out of the woods yet. The concentration of European funds among the strongest performers in the first months of the year does point to a reliance on further positive economic and political developments from the Eurozone. If that materializes, hedge fund returns could certainly remain elevated for 2013.